In a majority decision (Sales LJ dissenting), the Court found that the claimants were unable to demonstrate a properly arguable case that RDS owed a duty of care to third parties affected by the Nigerian operations of SPDC.

Background

The Ogale and Bille communities are seeking damages and remedial works in respect of oil spills from SPDC-operated pipelines. The claimants argued that RDS owed a duty of care to the claimants which arose from the control which it purportedly exercised over SPDC’s operations, such that RDS was a necessary and proper party to the claims.

RDS and SPDC applied to dispute the jurisdiction of the English court in respect of the claims. Fraser J at first instance rejected jurisdiction to hear the claims (see our original article for more details). The claimants appealed.

The Shell decision follows the Court of Appeal’s unanimous decision in Vedanta, in which it was held that similar environmental tort claims could proceed in the English courts on the basis that it was sufficiently arguable that the UK parent company owed a duty of care to the overseas claimants (in that case, 1,826 Zambian villagers living in proximity to its subsidiary’s Zambian copper mine) (see our article on this).

The principles

Jurisdiction

For the claim against RDS, the relevant jurisdictional gateway is Article 4 of the Brussels Recast Regulation. The ECJ decision in Owusu v Jackson held that Article 4 precludes the English Court from declining what is a mandatory jurisdiction where a defendant is a company domiciled in England and Wales.

As for the foreign subsidiary, RDS would act as an anchor defendant for the claimants to bring their claim in the English Courts. The relevant jurisdictional gateway is the necessary and proper party gateway under paragraph 3.1(3) of CPR Practice Direction 6B, which requires that the court consider the merits and reasonableness of the claim against the English anchor defendant as well as whether the additional foreign defendant is a “necessary or proper party” to the claim against the anchor defendant.

In this context, the court agreed with Fraser J that the central issue for the court’s jurisdictional analysis was whether there was an arguable duty of care between RDS and the claimants, such that there was a real issue to be tried between the claimants and RDS.

Parent company duties of care

For the purpose of the appeal, the parties accepted the Court of Appeal’s general statement of the relevant law in Vedanta, which was as follows:

In order to establish a duty of care the claimants need to satisfy the three-part test in Caparo v Dickman: (foreseeability, proximity and reasonableness).

Depending on the facts, a parent company may be liable for the operations of its subsidiary. Chandler v Cape provides four descriptive factors that may indicate the presence of a duty of care owed by the parent company, which are relevant to the proximity and reasonableness limbs of the Caparo test. Further guidance on potentially relevant circumstances is contained in Thompson v Renwick.

Such a claim is more likely to succeed if advanced by former employees, but claims made by third parties are still arguable.

A duty of care is more likely to arise where the parent company had “superior knowledge” or expertise about the operations of its subsidiary.

The parties agreed that the first limb (foreseeability) of the Caparo test was made out. The focus was whether RDS exercised sufficient control over SPDC to establish the necessary level of proximity to satisfy the second limb of the Caparo test. The Court gave limited separate consideration to the third limb (reasonableness) of the Caparo test, as it was accepted that the issues of proximity and reasonableness tend to run together.

The appellate judges approached the issue of proximity differently to Fraser J. The trial judge had focused on specific individual factors such as whether RDS was a party to the relevant joint venture agreement governing SPDC’s operations. By contrast, the appellate judges (who, unusually, had new evidence before them at the appeal) adopted a more contextual and universal approach to the facts when considering the issue of proximity.

All three appellate judges confirmed a primary distinction between (i) instances where a parent company exercises control over the material operations of a subsidiary and; (ii) instances where a parent company issues mandatory policies and standards which are intended to apply throughout a group of companies in order to ensure conformity with particular standards. This distinction formed the heart of the Court’s analysis and disagreement as to whether RDS owed a duty of care to the claimants. The majority held that this was an instance that fell in the latter category, while Sales LJ considered it fell in the former category.

Majority decision

The claimants relied on five main factors to demonstrate RDS’s arguable control of SPDC’s operations: (1) the issue of mandatory policies, standards and manuals which applied to SPDC; (2) the imposition of mandatory design and engineering practices; (3) the imposition of a system of supervision and oversight of the implementation of RDS’s standards which bore directly on the pleaded allegations of negligence; (4) the imposition of financial control over SPDC; and (5) a high level of direction and oversight of SPDC’s operations.

The judgment concluded that, on the basis of the evidence, none of the five factors demonstrated a sufficient degree of control of SPDC’s operations in Nigeria by RDS, either individually or cumulatively. As such, the claimants had not demonstrated an arguable case that RDS controlled SPDC’s operations, or that RDS had direct responsibility for the practices or failures which were the subject of the claim.

On the one hand, the evidence showed that the Shell Group was organised both through legal entities (ie parent, holding and operating companies) and on business and function lines. Moreover, there was documentary and witness evidence that the Shell Group was managed on functional lines rather than according to corporate status, with centralised decision-making at the RDS level. Indeed, the judges accepted that the evidence confirmed the standardisation (at RDS’s direction) of various operational, manufacturing, engineering and HSSE standards, policies and practices across all the operations and in all the countries in which the Shell Group operated.

However, to the extent that Shell’s group policies established mandatory requirements, they were mandatory across all companies with the Shell group. Crucially, SPDC retained autonomy in relation to the imposition of group standards, policies and practices. Although it was clear that RDS was keen to ensure that there were proper controls and policies in place within SPDC, the claimants had not demonstrated that RDS actively attempted to impose those controls and polices on SPDC; instead, RDS simply expected SPDC to apply them itself. It was also noted that reporting requirements between a subsidiary and its parent do not imply the existence of control.

Vedanta distinguished

It is noteworthy that Simon LJ gave the lead judgment in both the Shell and Vedanta cases; however, he did not dwell on the distinction between them. It is possible that he was reluctant to be too prescriptive in defining the requirement for proximity: in Shell, he cited Oliver LJ’s statement in Caparo that “proximity embraces not a definable concept but merely a description of circumstances from which, pragmatically, the courts conclude that a duty of care exists”. Indeed, the case law on parent company liability makes it clear that establishing a parent company duty of care is a matter of detailed factual analysis.

Nevertheless, the Chancellor offered a high level comparison between the two cases and noted several key factual distinctions which he considered had evidenced a material level of control in Vedanta. In particular, he noted that in Vedanta, the relevant subsidiary had a majority shareholding in the relevant joint venture, and was arguably in control of its operations. By contrast, the majority shareholding in the Nigerian joint venture belonged to a nationalised Nigerian company. In this way, SPDC (let alone RDS) lacked the capacity to avoid the breaches alleged by the claimants.

Further, the Chancellor noted that the typical corporate structure of multinationals tends to militate against proximity: “it would be surprising if a parent company were to go to the trouble of establishing a network of overseas subsidiaries with their own management structures if it intended itself to assume responsibility for the operations of each of those subsidiaries”. Nonetheless, he accepted that there were various circumstances where the necessary proximity could be established “even absent the kind of specific facts that existed in Vedanta”. By way of example, he described a potential situation where a parent company required and actively imposed on its subsidiaries or franchisees a specific manufacturing standard which turned out to be harmful to health.

Minority decision

In his dissenting judgment Sales LJ adopted a distinct approach to the question of proximity. He stated that neighbouring landowners are likely to be in a relationship of proximity with SPDC and cannot be said to be an indeterminate class of persons (contrary to Fraser J’s view that recognising a duty of care in this case could impose indeterminate liability on RDS). In Sales LJ’s view, the obvious risk of serious harm to neighbouring landowners from oil spills creates proximity and defines the relevant class to whom the duty is owed. As such, if RDS could be shown to have taken over practical control of the management of the operation and security of the pipeline and facilities from SPDC, or to have exercised shared control with SPDC, it would be arguable that RDS would be in a relationship of proximity with the claimants.

Sales LJ considered that the claimants had demonstrated a pattern of RDS sharing expertise and control in relation to handling he risk of oil spills in Nigeria, to a degree which was arguably capable of meeting the criteria for the imposition of a duty of care set out in Chandler v Cape. He also considered that the existence of group standards gave RDS the practical means of asserting executive power to control at least some aspects of the management of its operating companies. Further, the reputational and financial concerns shown by the evidence indicated that RDS had the will and intention to exercise that power. On this basis, he concluded that the claimants had an arguable case that RDS gave, monitored and enforced directions to SPDC regarding important aspects of the management of the pipeline and facilities, specifically in relation to controlling the risk of oil spills.

Observations

UK-headquartered multinational companies should be mindful that non-UK claimants may be able to bring claims against them in the English courts in relation to the overseas acts of their non-UK subsidiaries. Given that, the issue of control poses a significant tension: multinationals may seek to implement measures to prevent subsidiaries from causing harm or loss to third parties; however, there is a risk that imposition and enforcement of such measures could constitute control of and/or acceptance of responsibility for the operations of that subsidiary. This issue will require careful consideration.

As matters stand, the English Court’s approach to taking jurisdiction in these types of international mass tort claims remains broad, albeit that the Shell judgment confirms there are some limits to the scope of that jurisdiction.

However, this area of law remains subject to potential further developments on the basis that the claimants in Shell have recently stated that they intend to seek permission to appeal to the Supreme Court; similarly, the defendants in Vedanta have applied to the Supreme Court for permission to appeal. It will be interesting to see whether the Supreme Court decides to grapple with this issue and, if it chooses to do so, whether it will adopt a different approach. In the meantime, we do not anticipate that the Shell decision will result in a material reduction in the number of these types of claims being brought in the English Courts. No doubt claimants will seek to do all they can to attempt to demonstrate that the parent/subsidiary relationship and control is closer to the position in Vedanta than in Shell and thus seek to overcome any potential jurisdictional difficulties.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

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